Wednesday, February 11, 2009

On Tuesday, US Treasury Secretary Tim Geithner introduced a $1.5 trillion bank rescue plan that aims to recapitalize the banking sector and spur increased lending to individuals and businesses.The market's reaction to the plan (S&P 500 down 5% Tuesday) is the subject of some debate today. Did traders and investors show their disapproval of the rescue plan by selling shares, or was yesterday's decline simply a "sell the news" event? Whatever the verdict on yesterday's action turns out to be, one thing seems clear. In the long run, some market participants are doubtful that the plan will achieve any good at all. Another sticking point: when looking over some of the criticism of the Treasury's "Financial Stability Plan", complaints over a lack of detail seem to be a recurring theme. From Breakingviews.com, "A plan with no details": "After months of ad hoc bank rescue efforts, the markets hoped the new U.S. administration would deliver on its promise of a coherent, detailed plan for mending the financial system. So when the Treasury secretary, Timothy Geithner, offered only a bare-bones outline, leaving crucial questions unanswered, investors were not amused. The S&P 500-stock index fell some 5 percent on Tuesday, while some banks' shares declined multiples of that. The disappointment squandered precious market confidence in the administration.

Treasury's outline of its now-renamed "Financial Stability Plan" sounds reasonable as far as it goes. The government will subject banks asking for more support to stress tests and more scrutiny.

It will purchase preferred shares that can be converted into common stock. It will establish a vehicle to co-invest with private investors in banks' troubled assets. It will boost the purchase of certain asset-backed securities. And it will offer greater assistance to hard-pressed mortgage holders.

But missing from the package are crucial details on how each of these initiatives will work. How will the stress tests improve on banks' own, and how are they going to be used - will they dictate which banks are saved and which are allowed to fail? How will the preferred shares be priced? How much of a subsidy must the government offer private investors to lure them to buy shaky assets? And so on..." In recent days, noted investors and market observers such as Nouriel Roubini, Nassim Taleb, and Jim Rogers were interviewed by CNBC, where they all openly expressed doubts about the rescue plan. So we know how they feel about all this.